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Corporate Renewable PPA Forum Corporate renewable PPA structures and innovation by the REscale Corporate Renewable PPA Forum Agenda 1 The REscale Corporate Renewable PPA Forum 2 Main features & risks of a PPA structure 3 Main PPA structures used today 4 Challenges & innovative market developments The REscale Corporate Renewable PPA Forum The Corporate Renewable PPA Forum increases understanding and use of corporate renewable PPAs – globally. Global topical deep-dives: Buyers Lawyers, Multiple-buyer PPAs, IFRS accounting outline for PPAs, incl. energy- accounting Innovation in PPA structures intensive firms, Country deep-dives: industry investors India, Argentina, EU, China, Brazil / Australia Renewable Regulators developers / and policy Communication work utilities Corporate makers Renewable PPA Forum Report on ‘Corporate Renewable Power Purchase Agreements – Scaling up globally’ highlights the benefits of corporate renewable PPAs to purchase renewable power and improve bankability of projects; it also presents recommendations to overcome challenges faced by buyers and developers. Supported by: Partners: Outreach of the Corporate Renewable PPA Forum WBCSD members: 4.4 GW +54% Global: 19.6 GW +32% Source: Bloomberg New Energy Finance Main features of a PPA structure The following PPA discussions focus on a company purchasing (whether actually or notionally) electricity from an off-site renewable electricity project via a PPA (a corporate renewable PPA or corporate PPA) Parties Corporate PPA feature Summary In general, the owner of the renewable energy asset, as seller, and the corporate as buyer, who may use a utility or other market Parties participant as its agent. Pricing Tenor Tenor The period over which the corporate buyer is obliged to pay for Volume electricity contracted for under the PPA. It can be a fixed period subject to extensions. Subsidies Power market Power market Renewable power certification A PPA will reflect the design of the power market in which the generation facility is located and (potentially) where the corporate buyer’s demand is located. Main risks of a PPA structure Other PPA features can be considered in terms of how they manage risks that are common to most PPAs. Risk Summary Corporate buyer position Developer position Lender position Likely output over a May ask the dev. for May accept if achievable Lender will be aligned with Development risk period of time (e.g. 1y) minimum volume. & aggregated over time. developers Performance risk Volume risk Shape/profile risk Basis risk Balancing risk Captures variable Will often work with Limited examples where Lender will prefer that the Credit risk hour-to-hour output electricity supplier to developer accepts borrower have the least manage (for a fee) risk exposure feasible Price risk Tenor risk Change in law risk Force majeure risk Overview of the main PPA structures used today Main features of corporate PPAs in selected markets The discussion is based on the experience of authors and the WBCSD working group. However, this is an overview for discussion purposes. Actual deals within markets can be substantially different from one to the next. 1 Sleeved PPA structure 2 Synthetic PPA structure Feature Netherlands United Kingdom India United States Australia Evidence of standard documentation and risk allocation Influenced by Fixed price with Fixed price with Price flexibility Fixed price with Power market subsidy system inflation indexation annual escalation within cap & floor inflation indexation (cap&floor can of 1-3% (moving to price Parties mitigate risk) flexibility) Pricing Tenor Long term >10 years Existing plant: Long term Both long- and Volume (>15 years) 2-5 years (10-15 years) medium-term New plant: (mini-perm Subsidies 7-10 years 5–7 year debt) Renewable power certification Main risks of corporate PPAs in selected markets The discussion is based on the experience of authors and the WBCSD working group. However, this is an overview for discussion purposes. Actual deals within markets can be substantially different from one to the next. 1 Sleeved PPA structure 2 Synthetic PPA structure Feature Netherlands United Kingdom India United States Australia Development risk No minimum No minimum Trend for minimum Examples of Increasing trend for Performance risk volume volume volume & minimum minimum volume minimum volume consumption guar. Volume risk Shape risk Balancing risk Buyer’s Buyer’s - As available, may Developers & banks Credit risk responsibility responsibility see strike price less comfortable plus arrangement adjustments in with monthly Price risk with local utility markets with minimum generation time-of-use retail Tenor risk Change in law risk Challenges to accelerate the corporate PPA sector The discussion with the wider corporate renewable PPA forum of involved corporate buyers, developers and lenders indicates recurring challenges to accelerate the corporate PPA sector. Challenge 1 Challenge 2 Challenge 3 - - - volume & shape managing lender managing risk expectations complexity & time to complete deals Challenge 1 – volume and shape risk Intermittent generation creates uncertainty for developers, lenders & offtakers who have to consider practical & financial impacts of the output being different from forecasts & inconsistent with the demand. Contractual innovations Physical innovations 1 Seller – Project internalizes volume/shape risk 3 Seller – energy storage • By offering minimum volume guarantees • Integrate energy storage over an appropriate period of time (e.g. 1y) to smooth peaks & troughs in generation • Less frequently, by committing to a delivery profile, • Assist with imbalances on the grid such as seasonally or monthly 2 Seller – Proxy revenue swaps & other hedging 4 Buyer – demand-side response • The hedge provider pays the seller • Install smart digital telemetry & process controls a pre-agreed fixed price per annum that talk to their equipment • It removes merchant power risk and weather risk • Decrease/increase demand to match generation in an integrated derivative contract. profile if buyer has flexibility behind the meter Challenge 2 – managing lender expectations Intermittent generation creates uncertainty for developers, lenders & offtakers who have to consider practical & financial impacts of the output being different from forecasts & inconsistent with the demand. Main considerations How to achieve greater flexibility? for lenders 1 Merchant price risk 2 Credit support • Revenue certainty Lender may accept … Lender usually looks for • PPA tenor < debt tenor • Rated entity • Tenor • Price reopener • Parent company guarantee • Partial coverage of project output • Bank guarantee • Counterparty risk • … and adapt the debt package: • Letter of credit • Debt sizing, Reserves, Cost of debt, Debt term • Credit support Recommendation: Recommendation: • Security • Balancing between market prices, equity • To buyers: expectations & appetite for innovation acceptance & education • Termination • Developer refinancing strategy of the necessity • Staggered pricing models • To lenders: • Country risk • Sharing value with buyer consider actual risk of • New sources of debt payment default • Public sector support & ease of finding replacement Challenge 3 – managing complexity and time to complete deals The process to complete a corporate PPA is time consuming, complex and includes a steep learning curve for many buyers. This creates a barrier to entry for those that do not have the time or resources. What can be done? Accounting Standardization • Identify appropriate analysis • Assist developers & buyers to quickly reach agreement • Ensure accounting firms can offer • Relevant industry bodies to suggest fair risk allocations RE-Source NEO REBA Powerbloks GECCO PowerX PowerLedger EWF DLT platforms Sonnen Verv Aggregators Efficient matching • Simplicity for developers • Make it easier for sellers & Drift • Greater flexibility buyers to find each other … Summary – current practices & future innovation This discussion is both a snapshot of current market practices and an identifier of future growth and innovation. Current practices Future innovation • Some commonality on the main risks • Creditworthy aggregators to get to scale under different types and markets • Corporate buyers with good understanding of • Lot of room for standardization internationally relevant risks and preferred solutions • International/regional work needed to identify • Developments in volume and shape risk management broad approaches to fair risk allocation • Developers to continue to work closely with corporate buyers (or aggregators representing that demand) The greater the availability of transparent information regarding risks, the greater the speed at which corporate PPA transactions will deploy Thank you and stay tuned for the release of “Innovation in PPA structures” Disclaimer Acknowledgements A wide range of WBCSD members reviewed the We wish to thank the REscale member companies material, thereby ensuring that the document for their contributions and thought-leadership. broadly represents the majority view of the global Corporate Renewable PPA Forum. This report was drafted by Norton Rose Fulbright. It does not mean, however, that every company The report has been prepared for general within the forum agrees with every informational purposes only and is not intended to be word. relied upon as accounting, tax, legal or other professional advice. To contact WBCSD about this report: Germain Augsburger Manager, Renewable Energy [email protected] .
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